With Wall Street under attack and angry investors on a rampage for vengeance, law firms can breathe a little easier after a ruling by Manhattan federal district Judge Gerard Lynch in the Refco securities litigation. On Tuesday, Lynch dismissed claims against Mayer Brown and partner Joseph Collins, who represented Refco before and during its 2005 IPO.
The judge offered a broad interpretation of the protection afforded law firms by the Supreme Court's ruling in Stoneridge. He concluded that even if Mayer Brown and Collins engaged in fraudulent activity on Refco's behalf, they were not liable to shareholders unless they made misstatements directly to them. The firm was represented by John Villa of Williams & Connolly; Collins had William Schwartz of Cooley Godward Kronish.
The plaintiffs had alleged that Mayer Brown and Collins helped perpetrate a fraud at Refco by documenting loans that hid huge losses at the now-defunct brokerage giant. When Refco went public, Mayer Brown was one of two firms that drafted public documents for the IPO. (The other was Weil, Gotshal & Manges, which shareholders didn't name in their suit.)
Within weeks of going public, the company collapsed after the discovery of massive internal accounting fraud -- which Mayer Brown and Collins have always maintained they were unaware of. (For more on the firm's Refco troubles, check out this November 2008 American Lawyer article.)
But Judge Lynch wrote that Mayer Brown's role drafting the IPO prospectus was irrelevant to the shareholder litigation. Instead, he said, the relevant question was whether investors "reasonably understood Mayer Brown to be speaking" through offering documents. And he concluded that shareholders could not have had that understanding: The prospectus, he found, represented the company's statement, not Mayer Brown's.
The shareholders, who are represented by John "Sean" Coffey of Bernstein Litowitz Berger & Grossmann, still have claims against a long list of defendants, including Refco accounting firm Grant Thornton and IPO underwriter Goldman Sachs. Coffey told us he was disappointed with Lynch's ruling, but not terribly surprised, given the tough standard set by Stoneridge. "It highlights that something is very very wrong with the state of the law," says Coffey.
In a written statement, Mayer Brown said it was pleased with Lynch's decision, adding that "the firm acted in a professional, competent, and ethical manner in its work on behalf of Refco."
Mayer Brown and Collins still haven't disentangled themselves from the Refco mess, however. They face a RICO suit filed by Thomas H. Lee Partners, which did a leveraged buyout of Refco and then took it public, as well as a $2 billion suit filed by Refco's bankruptcy trustee. And, most seriously, Collins faces federal criminal charges of securities fraud and bank fraud. His trial, in Manhattan federal court, is scheduled to begin April 6.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.